There are all sorts of things which you should avoid when it comes to getting together the money you need for college and here we are going to look at four in particular – two which affect you directly as a student and two which may affect some mature students but which are primarily aimed at parents.
1. Excessive student loans.
Most students will need to take at least one loan (and frequently several loans) to get them through college and, since a good college education is likely to land you a higher paying job so that you can repay these loans, this is normally fine. Loans should however be kept to an absolute minimum and only be taken out to meet essential expenditure. In the case of federal loans you cannot of course borrow more than you need as this is one requirement of granting you a loan. However, when it comes to private loans, it is very easy to borrow a bit more than you need to cope with ‘unexpected’ expenditure. This little bit extra on each loan over several years can quickly add up however and run you into serious financial trouble.
2. Credit cards.
Today it is the easiest thing in the world to get a credit card (or indeed several credit cards) and no matter how good our intentions at the outset we always seem to end up maxing them all out and running into problems making even the minimum monthly payments required. Credit card do have a valuable role to play in our lives but while you are attending college you are probably better to simply stick with a debit card and leave the credit cards until you are out of college and have a well paying job.
3. IRA Withdrawals.
Parents are sometimes tempted to make withdrawals from their IRA accounts to help pay college fees but this is very rarely a good idea. Despite the fact that you are permitted to make withdrawals and will not have to pay a withdrawal penalty (normally 10%) if a withdrawal is made to meet higher education expenses, you will have to pay tax on any withdrawal at your highest tax rate. More importantly however you IRA is designed to allow you to build up a retirement fund in a tax efficient manner and even a modest withdrawal in the relatively early life of your IRA can reduce your retirement fund considerably. For example, a withdrawal of $10,000 today could easily result in a drop of $70,000 to $80,000 in the size of your retirement fund in twenty years time.
4. Borrowing From Your 401k.
If you have a 401k which allows you to borrow against it then this is also a tempting way for parents to borrow money to help their children through college. However, although in some ways this is a better alternative than taking money from an IRA, it nevertheless has the same effect on future earnings within the account and should be avoided if at all possible. Perhaps the one exception here is when you need to borrow money on a very short term basis and will be able to pay it back into your 401k reasonably quickly.
Naturally these are just a few of the ways that you should avoid when it comes to funding a college education and you can probably think of many your yourself. The secret is not to saddle yourself with debt which you are going to have difficulty repaying or to take money from any existing investment vehicle where you will suffer tax penalties and/or a significant loss in future earnings.